5 Ways that Alternative Lenders Use Your Business Bank Statements to Come After You.

One of the most common requirements from alternative lenders when preparing funding for small business owners is three months of business statements. These lenders use the bank statements to determine approvals and funding. However, if small business owners struggle to repay the alternative lender, the lenders utilize the Uniform Commercial Code (UCC) to pursue the small business owner. By employing liens and actions permitted under the UCC, alternative lenders use the information from the business owners' bank statements to collect. This article outlines various details that small business owners provide to alternative lenders through their bank statements.

By Thomas Tramaglini, Chief Operations Officer

The Center for MCA Research

thomas@beaconclientsolutions.com 

About Thomas Tramaglini

Send us 3 months of your business bank statements.

The script is simple. Brokers or alternative lenders ask for three months of business bank statements and a signed application giving the broker or alternative lender to pretty much do anything they want to you.

Why do alternative lenders ask you for your bank statements? Because most alternative lenders just do not get it. Literally.

For hedging risk related to purchasing future receivables or funding, bank statements provide a straightforward method for underwriters (or those who consider themselves as such) to evaluate variables like average daily revenue and the number of deposits to determine if a business qualifies for funding.

However, the reality is that relying on the number of deposits, average daily revenue, or even the number of negative days found in bank statements cannot accurately predict default risk. In fact, using bank statements for assessing funding risk is a poor strategy. We should be honest about this.

Most individuals managing alternative lending transactions are not financial experts, and they are aware of it. No one, not even those who gamble in Vegas, would engage in a game they believe is calculated if the success probability is below 50%.

Banks appreciate the almost 100% repayment likelihood of SBA and business loans because they understand underwriting and use precise methods to assess risk, such as metrics like annual profit on taxes and the debt service coverage ratio (DSCR).

Most funders, like MCA shops, are unfamiliar with DSCR and how to calculate essential metrics that would safeguard small business owners and their own investments.

Bank statements are packed with information which alternative lenders will use once their client's default.

While using bank statements are an incredibly bad thing use to gauge risk in funding, bank statements contain gems which can aid in collections when small business owners default.

Give them your statements and a blatant disaster is looming.

5 things you give alternative lenders when you give them your bank statements.

1 - You provide your sources of income.

By providing business bank statements to alternative lenders, one gives the alternative lender all of their sources of income. So, once you default, the alternative lender will check who pays you and immediately sends those payers UCC 406 letters restraining your funds. Once those funds are froze, you are basically roped into accepting what the alternative lender makes you pay (or you lose all funds frozen) which is never good. Further, because of UCC rules, most alternative lenders do not have to negotiate with you until you are either in submission and ready to file bankruptcy or take the lender to court, if you can afford it.

2 - You tell the creditor what you spend money on.

The creditor knows what you spend money on. When you are making a deal to reconcile debt, you better have bank statements which have only business expenses on it or it can be used against you. For instance, if you are paying money on a car or membership to a club, they will use that to drive you into the ground.

There is also exposure on what other accounts the business is sending money to like personal accounts, payroll accounts, and more. When UCC comes a calling, everything is pretty much up for grabs so one should be cognizant of this.

3 - You tell the creditor how healthy your business is or is not.

When you provide bank statements, you show how much money you make and how much money you spend. Overall, this is a critical part of negotiating payment plans or mediating trouble paying. Further, as mentioned above, if you are spending money on things like Burger King and personal expenses it will be used against you.

4 - You give your banking information to the creditor.

Bank statements tell the alternative lender who you bank with, and with that comes your account information. When you default, alternative lenders will quickly cut you off from your bank accounts. Again, this will make your negotiation stance one of weakness and overall cause you to make a bad deal to get your bank account unfrozen. And while alternative lenders in most cases need a judgement to take your money from the bank, they will get a judgement and take your money if they can.

5 - You provide the information of your processor(s).

When you give alternative lenders your bank statements you provide them who your processors are. This can be another deadly step for the small business owner. The bank statements tell the alternative lender who processes your ACH or credit card payments. Once they have that information, it is only a matter of time until the alternative lender sends UCC 406 letters to the processors which freeze your funds. And unlike banks, the processor are ordered to send funds directly to collections without a judgement or even a lawsuit.

So what?

Overall, small business funders who collect bank statements think they are making sound decisions but in the end, they are just using an awful non-scientific way of gauging risk for default. Most of the time they lose. And when defaults happen, their saving grace is that they have three months of information that they can use to go after small business owners. We advise those are considering alternative funding or who have defaulted to consider the pros and cons of providing alternative lenders their bank statements.

The Team at Beacon Can Help.

The team at Beacon Client Solutions regularly works with clients who have been taken advantage of by MCA companies.  Specifically, those business owners who have been burned.

The solution is simple.  Get Help.  Now.

Dr. Thomas Tramaglini is the Managing Director and Negotiations Manager for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorate in Organizational Leadership from Rutgers, The State University of New Jersey.

Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico, and Canada.